The Federal Reserve Part 2
Glenn Leest - Senior Investment Adviser at WT Wealth Management
John Heilner - Chief Investment Officer at WT Wealth Management
1) What are some ways the Federal reserve can affect unemployment and inflation through monetary policy?
Overnight Fed Funds Rate
- This is the rate the Federal Reserve charges to lend money to the government and banks overnight
- Overnight rates are the rates at which banks lend funds to each other at the end of the day in the overnight market.
- The goal of these lending activities is to ensure the maintenance of federally mandated reserve requirements.
- When a bank cannot meet its reserve requirement, it will borrow from a bank that has a surplus reserve.
- Overnight rates are predictors of short-term interest rate movement in the broader economy and can have a domino effect on various economic indicators such as employment and inflation.
- The higher the overnight rate is, the more expensive it is for consumers to borrow money, as the increased cost to banks is passed onto consumers.
Quantitative easing
- This is the process of the Federal Reserve buying Bonds from the US government, Corporations, Cities, and mortgage back securities
- The debts are then put on the Balance Sheet of the Federal Reserve
- The Balance Sheet of the federal
- The Fed, by law, can only purchase government-backed debt, but in severe emergencies, it’ll create a special “lending facility” that it’ll fund, along with funding from the Treasury Department as a backstop. Then, it’ll use that facility to purchase other types of debt, such as corporate or municipal bonds. Those special facilities are then listed on the Fed’s balance sheet, as they were in the aftermath of the coronavirus crisis
2) What affect does rising interest rates have on the overall economy?
- When interest rates increase, the cost of borrowing goes up. This mechanism causes people to usually borrow less due to the high cost of debt.
- 30-year 700k mortgage @ 3.0% is $2951 a month
- 30-year 700k mortgage @ 6.0% is $4196 a month
- 30-year 700k mortgage @ 8.0% is $5136 a month
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